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Operating Leverage will be high in industries with:
AMostly variable costs
BNo depreciation
CNo costs at all
DMostly fixed costs (e.g. airlines, hotels, manufacturing)
Answer & Solution
Correct answer: D. Mostly fixed costs (e.g. airlines, hotels, manufacturing)
1. DOL is high when fixed costs dominate the cost structure.
2. Industries with heavy fixed assets (airlines, manufacturing, hotels) have high DOL.
3. Small drop in sales causes a large drop in EBIT.
_Source: ICAI BoS CA Inter Paper 6A, Ch 6 "Financing Decisions — Leverages", §3_
Related questions
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